The elites who matter in the formation of economic policy have long favored a national value-added tax (sort of like a sales tax), and from time to time we see puff pieces like this one in today’s the New York Times. The story is always the same: we (the masses) need to consume less and save more, so that the economy can be fertilized with more investment and grow faster over the long run. The urgency of this message is amplified by two more current concerns: changing America’s consumption behavior is seen as key to bringing down the current account deficit, and the mushrooming fiscal deficit requires fresh thinking on the tax front.
It’s all rejectable.
1. The decision to save does not prompt a decision to invest. It might lower interest rates, but interest rates are only weakly related to business investment (unlike investment in housing which does not stoke productivity), and in any case interest rates will be low in the US for years to come. (Yield curves tell us this.) The only circumstance under which savings are a bottleneck for investment arises in an economy that is generating high levels of investment for other reasons. European countries that use a VAT, for instance, typically have industrial policies, whether they admit it or not, which keep investment bubbling. In the US, less consumer spending means depressed employment and output. This is in our probable future no matter what, but why exacerbate it?
2. We are back to the tail and the dog, the horse and the cart, or whatever metaphor strikes your fancy: is the yawning US trade deficit (down but not sustainably in the latest monthly release) the result of spending beyond our means, or have our means been downsized by decades of outsourcing and reliance on imports? Those who have followed this blog know that I think the weight of logic and evidence comes down mainly on the side of explanation #2. Thumbnail version: the first story depends on confusing identity with behavioral relations—to be a net importer is to identically be a net dissaver—and the evidence on potential transmission mechanisms clearly points to the primacy of trade competitiveness, or lack thereof, in recent US history. (There will be a new paper on this topic for the Atlanta meetings.)
3. Big fiscal deficits at a time of deep recession are the medicine, not the disease. If the US economy remains this depressed for years into the future then, yes, the deficits are dangerous—but the cause is the economy, not the fiscal policies taken to stanch the bleeding.
But there is a bigger story here. During the decades in which the Washington Consensus was gospel, we were told that, because markets could do no wrong, the private sector should be free to accumulate as much debt, and in whatever form, as it chose, whereas governments, being irredeemably corrupt and incompetent, must be held to the highest standards of fiscal prudence. Then the roof caved in, and now the private debt has been nationalized. Today we look to the sovereign advantages of government as debtor of last resort to hold off the threat of private insolvency and credit gridlock. Indeed, from a purely arithmetic standpoint, if households and businesses in the US commit to deleveraging, the US external deficit can only be sustained by fiscal deficits of a similar magnitude.
This problem cannot be solved by playing with the tax system.